Lessons but few precedents from APRA’s loss to IOOF

Unless the Government decides to amend the Superannuation Industry (Supervision) Act (SIS Act) then the Federal Court’s decision dismissing the Australian Prudential Regulation Authority’s (APRA’s) action against IOOF Limited will stand as a key legal benchmark with respect to the use of a member reserve.

However, putting aside the legal complexities of the decision of Justice Jayne Jagot with respect to APRA v Kelaher [2019], the outcome also makes plain just how difficult it is for a regulator such as APRA to translate arcane regulatory interactions with superannuation funds into a successful prosecution.

It also makes clear that just because a financial services regulator publishes what it holds to be a policy position, does not mean the position has the force of law.

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What became clear in the Federal Court decision is that the years of behind-the-scenes meetings and communications which can occur between the prudential regulator and a superannuation fund are not easily translated into prosecutable facts.

APRA’s interactions with IOOF around the issues with its two registrable superannuation entities – IIML and Questor went on for years and the whole issue only really came to a head when the matter was traversed as a case-study during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

However, the theatre and headline-making of the Royal Commission did not translate into the technical fact-based environment of the Federal Court especially because, in the end, APRA found itself substantially relying on IOOF’s documentation to make its case without actually being able to put full context around those documents.

The Federal Court decision also makes plain that just because Counsel assisting the Royal Commission suggested wrongdoing on the part of IOOF and some of its senior executives never meant that the argument would stand up in court notwithstanding views expressed by the commissioner, Kenneth Hayne.

Importantly, the issues surrounding IOOF which APRA unsuccessfully attempted to prosecute were detailed in a case study published in the Royal Commission final report and while the matter was on foot before the Federal Court.

Despite this, commissioner Kenneth Hayne still saw fit to traverse other elements of IOOF’s behaviour, including around grandfathered adviser commissions, and to offer the opinion that the company not had acted in the best interests of members and therefore referring the matter to the regulator.

APRA has now confirmed that it will not be contesting the Federal Court’s decision with respect to its action against IOOF and its former managing director and chief executive, Christopher Kelaher, but it remains open to the regulator to pursue the other issues which have been directed towards it by Hayne.

It is also worth noting that notwithstanding the issues raised by Hayne, in the aftermath of APRA’s decision not to appeal the Federal Court’s decision, IOOF’s acquisitions of ANZ’s OnePath Pensions and Investments business was cleared to proceed.

Given the Federal Court’s decision and not withstanding Hayne’s referral it seems most unlikely that APRA will have the appetite to pursue further court action against IOOF but that does not preclude it imposing some form of regulatory sanction against the company.

As law firm MinterEllison made clear in its analysis of the Federal Court’s decision, Justice Jagot found that APRA failed to prove that there had been any breach of any covenant and, in doing so, she rejected the regulator’s case on the basis that “none of APRA’s claims of contraventions of the SIS Act against the respondents are sustainable with the consequence that there is no foundation for the making of any disqualification orders and the further amended originating application should be dismissed”.

The law firm noted that Jagot’s decision noted that she had found APRA’s approach “unpersuasive” and “fundamentally inadequate”, noting that it was for the regulator to prove the primary facts but that it had failed to do so.

“…it was for APRA to prove its case of contraventions by such evidence as it saw fit. The fact that it has chosen to run a purely documentary case means that it must take the documents as it finds them – as documents brought into existence for specific purposes, mostly by authors whose qualifications and experience are unknown, using the benefit of hindsight, often expressed at a high level of generality, and assuming otherwise unproven knowledge of IOOF’s systems, policies and procedures.”

The law firm also noted that Justice Jagot had been critical of APRA’s reliance on its own expressions of opinion (either by communicating its view directly to the respondents or via policy publications) observing that “the fact that a particular person was aware of APRA’s opinion is not relevant to the existence of any of the assert contraventions”.

THE STATUS OF MEMBER RESERVES

The MinterEllison analysis also noted the Federal Court’s view on the use of member reserves and found strongly in favour of the IOOF position.
It noted that APRA had argued that the Operational Risk Financial Requirement (ORFR) and the general reserve constituted ‘members’ money’ and therefore could not properly be used to compensate members for losses caused by other companies in the IOOF group or a third party.

More particularly, APRA argued that in deciding to use the ORFR the trustee and its directors were bound by ss 52 and 52A.  As such, any decision to use the reserve “must be made in the best interests of beneficiaries and that cannot be the case where there are other sources of compensation available, outside of the trust fund, that are not being considered and pursued”, the analysis said.

However it noted that Justice Jagot had rejected the regulator’s argument and had observed that ‘it is misconceived and a complete mischaracterisation to describe the ORFR as ‘members’ money’.

“…it is money in a dedicated fund, held in accordance with the provisions of the SIS Act, for the express purpose of paying compensation to members for losses arising from operational risk, including risks arising from the trustee’s conduct.

“Using that fund to compensate members in such circumstances does not involve compensating members with their own money in any relevant sense; rather, it is to use the fund for the very purpose for which it was created.”

The MinterEllison analysis noted that, likewise, Justice Jagot was unpersuaded that the ‘general reserve’ could not be used for the purposes for which they were established and maintained, including compensation of members.

The full cost of the failed Federal Court action is expected to show up in the Australian Prudential Regulation Authority’s next annual report.  




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this is the problem...lawyers want to pursue case to justify their roles, but don't care about the bigger function of the company. Not sure if this is the case in Governmental roles, though they should take a good hard look at themselves. Also to an extend, reveals the RC to be a "show" not always steeped in great substance. There was no doubt a huge cultural and ethical issue with Senior execs at the banks and AMP with getting ongoing advice revenue with no advisers around, the specific issues of case study seemed a beat up.

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